For well over a century, few investment vehicles have helped make people richer than the stock market. The market may not go up every year or always outperform other asset classes, such as gold or bonds, but its average annual return runs circles around the average yearly return of other assets.
But over the past decade, this thesis of stock-market superiority has been called into question by the rise of cryptocurrencies. In particular, retail investors have flocked to joke-based digital currency Dogecoin (DOGE 2.74%), which gained as much as 27,000% in a six-month stretch between early November and early May.
Dogecoin is a dud because it lacks competitive advantages
In the eyes of Dogecoin optimists, their meme coin is the future world's currency. They believe they're getting in well before broad-based adoption occurs. But there's one glaring problem with their thesis: The "people's currency," as Dogecoin came to be known, has absolutely no competitive advantages.
Dogecoin "hodlers" (holders of the token) regularly point to its lower relative transaction fees to the Big Two in crypto, Bitcoin and Ethereum. But that overlooks the other side of the equation. A number of other popular cryptocurrencies charge a fraction of what Dogecoin does per transaction (or perhaps nothing at all). In no particular order, these include: Nano, Ripple, IOTA, Bitcoin Cash, Bitcoin SV, Ethereum Classic, DigiByte, Qtum, Monero, Dash, Cardano, Stellar, and Litecoin; the list goes on, but we'd be here for a long time if I continued.
If Dogecoin's transaction fees aren't an advantage in the crypto space, then it must have an impressive validation and settlement time, right? Nope. Nano, Ripple, and Stellar, just to name a few, validate and settle transactions on their respective blockchains in a matter of seconds.
If you think Dogecoin's advantage is in handling volume on its blockchain network, you'd also be mistaken. At its peak, Dogecoin's blockchain is reportedly capable of 40 transactions per second. Meanwhile, payment processing kingpin Visa can process 24,000 transactions each second -- or roughly the same number of transactions occurring on Dogecoin's blockchain in an entire day. Within the crypto space, Stellar claims to be able to process 3,000 transactions per second. No matter how you slice the data, Dogecoin has no edge.
It doesn't even have an advantage as an inflation hedge. Cryptocurrency mining of Dogecoin is increasing the token count by a little over 4% in 2021. It's been more than a decade since the U.S. has regularly seen 4% or greater inflation.
Unlike Dogecoin, these stocks have real-world competitive advantages
The fact is that Dogecoin is nothing more than a hyped asset with virtually no real-world utility. The good news is that you can choose to put your money to work in stocks that do offer tangible competitive edges -- and they'll likely make you far more money than Dogecoin ever will. The following trio of companies should excel over the long run due to their plain-as-day competitive advantages.
Want to know one of the easiest ways to lock up a competitive edge? The answer is to be the only company allowed to operate in a particular space. Sirius XM (SIRI -0.43%) is effectively a legal monopoly, as the only satellite-radio operator. While it's not devoid of competition, its role as the lone satellite provider gives it a number of advantages.
Arguably the biggest edge for Sirius XM is the company's operating model. The company's online and terrestrial radio competitors are predominantly reliant on advertising to generate revenue. Meanwhile, Sirius XM brings in most of its sales from subscriptions. This distinction is important, because inevitable periods of economic contractions or recessions often lead to advertising dollars disappearing quickly. By comparison, subscription churn rate doesn't budge much, if at all, during recessions. This means Sirius XM is well-insulated against downturns in the economy and is better-positioned than other radio providers.
Furthermore, Sirius XM's satellite network also benefits from a handful of nearly fixed costs. Although paying for talent and royalties can vary from quarter to quarter, the company's transmission and equipment expenses are virtually static. No matter how many new subscribers Sirius XM signs up, these expenses don't really move. That's a recipe for higher operating margins as the company's subscriber base grows over time.
Another well-known company with clear-cut competitive advantages that could make investors rich is warehouse club Costco Wholesale (COST 0.83%). Costco is currently riding a 12-year total return winning streak, which is a fancy way of saying that, including dividends, it hasn't had a down year since 2008.
Sometimes, size matters. In Costco's case, the company uses its large size and deep pockets to purchase goods in bulk. Buying in bulk allows Costco to pay less per unit purchased, which in turn lets the company undercut grocery chains on the price for a number of regularly purchased staples. Even though groceries provide very low margins, the price discount Costco nets from buying in bulk helps it to drive new and existing members into its stores. If these members buy higher-margin discretionary items, too, it's a win.
The membership model also provides key benefits for Costco. The fees the company collects from annual memberships help to fatten up its margins, while ensuring it continues to undercut local grocers on price. Additionally, paying for the right to shop at Costco gives consumers an incentive to stay within the Costco ecosystem of products and services. This drives customer loyalty and higher annual spending.
If you want utter dominance, take a closer look at how much internet search traffic is routed through Google. According to data from GlobalStats, Google has controlled between 91% and 93% of worldwide internet search over the trailing year. The next-closest competitor is Microsoft's Bing, at just over a 2% share. With this high a share of global internet search traffic, it should come as no surprise that advertisers are lining up and willing to pay big bucks for placement on Google's search platform.
The crazy thing about Alphabet is that two of its ancillary projects have also blossomed into massive businesses. Streaming content platform YouTube is one of the three most-visited social sites in the world. Meanwhile, Google Cloud has grown into one of the three largest cloud infrastructure service platforms. Between steady double-digit growth from Google and considerably faster sales growth from YouTube and Cloud, Alphabet's operating cash flow is set to skyrocket.